The role of biofuels in the energy future: Lessons from Brazil

To further understand biofuels, I decided to travel to Brazil, where the modern biofuel industry has started and flourished. I believe that before you develop a model, you need to speak with the people that know what is going on to have a realistic perspective. Therefore I went with Madhu Khanna for a 10 day visit to Sao Paulo, Rio de Janeiro, Piracicaba, Campinas and Brasilia and spoke with government officials, investors, environmentalists and obtained what I believe to be a well-rounded perspective. In the process, we learned to appreciate Brazil’s vast resources, their hard-working, fun-loving people (in Brazil, it is not a contradiction) and enjoyed the country’s beauty, weather and food.

The Brazilians are proud of their biofuel industry, which is one of the main sectors that is putting the country on the move to becoming one of the major player in the future. The industrial effort to produce ethanol for vehicle transportation started in 1975, and in the 1980’s the Brazilians introduced cars that only ran on alcohol. However after some crop failures, the experiment with the ‘alcohol car’ ended and the industry had to rebound and rebound it did. The government introduced a standard that required use of 25% alcohol with gasoline, and in 2003 flex cars were introduced. These are cars that can run on any mix of gasoline and ethanol and currently 90% of the new, light cars in Brazil are flex vehicles.

We discovered that the ethanol industry in Brazil has huge potential to grow. A conservative estimate based on different sources suggests that the area of sugarcane dedicated to biofuel can grow six-fold (from 5 million hectares to 30 million hectares) without adding to deforestation. Brazil has more than 140 million hectares available for expansion outside the forest. Actually, out of 330 million hectares of arable land, only about 75 million hectares are used for crops. So the 30 million hectares that I mention is a very conservative estimate. Furthermore the productivity of the sugarcane industry in Brazil have been expanding and can expand much further, both by improved practices in the field and use of some of the cellulosic residues from sugarcane production to produce more ethanol. So by 2030, it is plausible that yield of ethanol per hectare will double (probably will grow even further) so the total production of ethanol can grow twelve-fold compared to the present. That can satisfy the Brazilian need, leaving a large volume for export. Of course, this potential will only realize if the high prices of oil (above 80.00/barrel) continue or if countries introduce stricter greenhouse gas emission standards (or preferably a meaningful carbon tax) that will add to the relative profitability of sugar ethanol, production of which emits relatively very small amounts of greenhouse gas emissions.

While the potential of Brazilian ethanol is vast, during the last several years the industry has been stagnant. There are several reasons for the current situation. First, ethanol is competing with gasoline and the price of gasoline in Brazil has been capped, thus the price received by ethanol producers is significantly below the world price. Secondly, the value of the Brazilian currency, the real, is appreciating which adds extra cost of production and marketing. Thirdly, because of the financial crisis, growers were unable to obtain financing to replant sugarcane and thus the plants got older and less productive. Furthermore, the interest rates in Brazil are exorbitantly high in real terms, 10%, and this increases the cost of investment. Finally, ethanol competes with sugar and the price of sugar increased so the share of sugarcane juice allocated for ethanol declined. These tough conditions of the industry have lead to significant restructuring, whereby major multinational corporations have become the major players in the industry. However, the resulting inflow of resources and knowledge is likely to increase productivity of existing resources in the short-run and result in further expansion down the line. While growth of the industry may be stalled by uncertainty about domestic ethanol pricing and constraints on foreign ownership of assets, we believe that if global high gasoline prices are sustained and clean fuels are rewarded, then the Brazilian ethanol industry will reach its potential by 2030.

The visit to Brazil increased my appreciation of the biofuel industry in the United States. The US corn ethanol production has exceeded the Brazilian production, even though it has been relying on an inferior feedstock. Furthermore, Brazil is now importing US corn ethanol to meet its growing domestic needs in the short-run. The US corn ethanol industry has reduced its greenhouse gas emission and cost of production significantly during the last 6 years (still it emits much more than sugarcane). The US biofuel industry has benefited from a subsidy and now that it is mature and competitive, subsidies should be stopped.

The negative impact of corn ethanol on food prices can be reduced, if not eliminated, by reducing the unreasonable restrictions on the application of agricultural biotechnology on food crops especially in Europe, Asia and Africa. Increased productivity of farm production from existing and emerging transgenic varieties will reduce acreage required for food production and probably will reduce food prices and may even expand area available for biofuels. Nevertheless the potential for expansion of corn biofuel in the US is very limited compared to Brazil, but when cellulosic ethanol becomes profitable, that would lead to a new expansion of biofuel production and expand the capability of biofuel to replace fossil fuels for cars. It is not unreasonable to expect that more than 30% of the car fuels globally will be replaced by biofuels within 25 years.